3 steps to watch chess: How far is it from regularization to becoming a currency?

Original title:How stablecoins become money: Liquidity, sovereignty, and credit

Original author: Sam Broner

Original translation: Ethan, Odaily Planet Daily

Traditional finance is gradually accepting stablecoins, and its market size is also expanding. Stablecoins have become the optimal solution for building global financial technology - because of their three core advantages: high speed, near-zero cost and high programmability . The transformation of the old and new technological paradigms means that the logic of business operations will usher in a fundamental reconstruction; this process will also give rise to new risks. After all, the "self-custodial model" denominated on digital bearer assets (rather than bookkeeping deposits) is essentially different from the banking system that has lasted for hundreds of years.

So, what more macro monetary structure and policy issues do entrepreneurs, regulators and traditional financial institutions need to deal with in order to make a smooth transition? We will conduct in-depth discussions around the three major challenges to provide builders (whether they are startups or traditional institutions) with current focus solutions: currency singleness, dollar stablecoin practices in non-dollar economies, and the reinforcement effect of Treasury bond endorsement on currency value.

The Challenges of Monetary Money and the Construction of Unified Monetary

System

Monetary currency refers to the fact that all forms of currency in an economy (regardless of the issuing entity or the deposit method) can be freely exchanged at face value (1:1) and used for payment, pricing and contracts. Its essence is that even if there are multiple institutions or technical monetary tools, a unified monetary system can still be formed . In practice, the US dollar of Chase Bank, Wells Fargo, Venmo account balance and stablecoins should theoretically maintain a strict exchange relationship of 1:1 - although there are differences in asset management methods of various institutions and the importance of regulatory status is often ignored. In a sense, the history of the US banking industry is a history of constantly optimizing the system to ensure the interchangeability of the US dollar.

The reason why the World Bank, central banks, economists and regulators advocate monetary singleness is that it can greatly simplify transactions, contracts, governance, planning, pricing, accounting, security and daily payment processes. Today, businesses and individuals have taken currency uniformity for granted.

But stablecoins have not yet realized this feature - due to insufficient integration with traditional financial infrastructure. If Microsoft, banks, construction companies or home buyers try to exchange US$5 million stablecoins through automatic market makers (AMMs), the actual exchange amount will be less than 1:1 due to the slippage of liquidity depth; large transactions will even cause market fluctuations, resulting in users who eventually get less than US$5 million. If stablecoins want to achieve financial revolution, this situation must change.

The unified denomination redemption system is the key. If stablecoins cannot operate as part of a unified monetary system, their effectiveness will be greatly reduced.

The current operating mechanism of stablecoins is as follows: issuers (such as Circle and Tether) mainly provide direct redemption services to institutional customers or users who pass the verification process (such as Circle Mint (formerly Circle Account) to support enterprises to mint and redemption USDC; Tether allows verified users (usually the threshold exceeds 100,000 US dollars) to directly redeem); decentralized protocols (such as MakerDAO) realize fixed exchange rate exchange between DAI and other stablecoins (such as USDC) through the peg stability module (PSM), essentially playing a verifiable redemption/conversion tool.

Although these solutions are effective, their coverage is limited and require developers to cumbersomely connect with each issuer. If you cannot directly connect, the user can only exchange it between different stablecoins, or exit through market execution (rather than face value settlement).

Even if the enterprise or application promises extremely narrow price spreads, such as strictly maintaining 1 USDC to 1 DAI (the spread is only 1 basis point), this commitment is still subject to liquidity, balance sheet space and operational capabilities.

The central bank's digital currency (CBDC) can theoretically unify the monetary system, but it comes with problems such as privacy leakage, financial monitoring, restricted money supply, and slowdown in innovation, making those optimization models like existing financial systems more likely to win.

Therefore, the core challenge for builders and traditional institutions is: how to make stablecoins (joining bank deposits, fintech balances, cash) truly become currency. The realization of this goal will create the following opportunities for entrepreneurs:

Universal minting and redemption: issuers cooperate in depth with banks, financial technology and other existing infrastructure to achieve seamless replenishment and inject interchangeability into stablecoins through existing systems, making them no different from traditional currencies;

Stablecoin Clearing House: Establish a decentralized collaboration mechanism (similar to ACH or Visa's stablecoin version) to ensure instant, frictionless and transparent exchange. Currently PSM is a feasible model, but extending its functionality to achieve 1:1 settlement between participating issuers and fiat currencies will be better;

Trusted and neutral mortgage layer: migrate convertibility to widely adopted mortgage layer (such as tokenized bank deposits or US bond package assets), so that issuers can flexibly explore brand, market and incentive strategies, and users can unpack and exchange on demand;

Better exchanges, intention execution, cross-chain bridges and account abstractions: use upgraded versions of existing mature technologies to automatically match the best charging and withdrawal path or perform optimal exchange rate exchange; build a multi-currency exchange with the smallest slippage. At the same time, hiding complexity ensures that users enjoy predictable rates (even at large scale).

US dollar stablecoins, monetary policy and capital regulation

Many countries have huge structural demand for the US dollar: for residents of countries with high inflation or strict capital controls, the US dollar stablecoin is a "savings umbrella" and a "global trade entrance"; for companies, the US dollar is an international account unit, which can simplify cross-border transactions. People need a fast, widely accepted and stable currency for revenue and expenditure, but the current cost of cross-border remittances is as high as 13%, 900 million people live in high-inflation economies without stable currencies, and 1.4 billion people do not have access to adequate banking services. The success of the US dollar stablecoin not only confirms the demand for the US dollar, but also reflects the market desire for a better currency.

In addition to political and nationalist factors, one of the core reasons why countries maintain their local currencies is to respond to local economic shocks (such as interruption of production, decline in exports, and fluctuations in confidence) through monetary policy tools (interest rate adjustments, currency issuance).

The popularity of US dollar stablecoins may weaken the effectiveness of policies in other countries - its root cause lies in the Impossible Trinity in economics: a country cannot achieve the three major goals of free capital flows, fixed/strictly managed exchange rates and independent formulation of domestic interest rate policies.

Decentralized point-to-point transfer will impact these three major policies at the same time:

• Bypassing capital controls, forcing the capital flow valve to be fully opened;

• Dollarization weakens the policy effectiveness of exchange rate control or domestic interest rates by anchoring international account units;

• Countries rely on the agency banking system to guide residents to use their local currency, thereby maintaining the implementation of policies.

However, the dollar stablecoins are still attractive to other countries: the lower-cost, programmable dollar can promote trade, investment and remittance (most global trade is denominated in US dollars, and the circulation of US dollars improves trade efficiency); the government can still impose taxes on the recharge and withdrawal process and supervise local custodians.

However, anti-money laundering, anti-tax evasion and anti-fraud tools at the agency bank and international payment levels are still obstacles to stablecoins. Although stablecoins run in public programmable ledgers and security tools are easier to develop and build, these tools need to be implemented in practice - this provides entrepreneurs with the opportunity to connect stablecoins to the existing international payment compliance system.

Unless sovereign states give up valuable policy tools (very low probability) in pursuit of efficiency, or give up fighting financial crime (with less probability), entrepreneurs need to build systems to optimize the integration of stablecoins with the local economy.

The core contradiction lies in: how to strengthen safeguards (such as foreign exchange liquidity, anti-money laundering (AML) supervision, macro-prudential buffering) while embracing technology to achieve compatibility between stablecoins and local financial systems. The specific implementation paths include:

• Localization acceptance of US dollar stablecoins : connect US dollar stablecoins to local banks, financial technology and payment systems (supports small, optional, and possible taxable exchanges), and improve local liquidity without completely impacting the local currency;

• As a bridge for charging and replenishing: launching a local currency stablecoin with deep liquidity and deep integration into local financial infrastructure. Although the clearing house or neutral mortgage layer is required to be initiated (refer to Part 1), once integrated, local stablecoins will become the optimal foreign exchange tool and default high-performance payment track;

• On-chain foreign exchange market: build a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to hold interest-generating instruments as reserves and support existing forex trading strategies through leverage;

• Western Union Competitive Products: Build a compliant offline cash recharge network and incentivize agencies through stablecoin settlement. Even though MoneyGram has launched similar products, other agencies with mature distribution networks still have room;

• Compliance upgrade: Optimize existing compliance solutions to support stablecoin tracks. Leverage the programmability of stablecoins to provide richer, real-time insights into capital flows.

The impact of Treasury bonds as collateral for stablecoins

The popularity of stablecoins is due to its near-instant, near-zero cost and infinitely programmable characteristics, rather than Treasury bond endorsement. The reason why fiat currency reserve stablecoins were first widely adopted is only because they are easier to understand, manage and regulate. User requirements are driven by practicality (7 × 24 settlement, composability, global demand) and confidence, rather than collateral structure.

But fiat reserve stablecoins may be in trouble due to success - if the issuance volume increases 10 times (such as from the current $262 billion to $2 trillion in years), and regulators require it to endorse it with short-term U.S. T-Bills, how will this impact the collateral market and credit creation? Although this scenario is not inevitable, its impact may be far-reaching.

Short-term Treasury bond holdings surge

If the $2 trillion stablecoin is invested in short-term Treasury bonds (one of the few assets that are clearly supported by regulators), the issuer will hold about 1/3 of the $7.6 trillion short-term Treasury stock. This role is similar to current money market funds (centralized holders of low-risk liquid assets), but has a more significant impact on the Treasury bond market.

Short-term Treasury bonds are high-quality collateral: a globally recognized low-risk, high-liquid assets, and denominated in US dollars, simplifying exchange rate risk management. But the issuance of $2 trillion stablecoin may lead to a decline in Treasury yields and a contraction in liquidity in the repurchase market - every new $1 stablecoin investment is an additional bid for Treasury bonds, allowing the U.S. Treasury to refinance at a lower cost, or making it more difficult for other financial institutions to obtain the collateral required for liquidity (pushing up its costs).

The potential solution is the Ministry of Finance to expand short-term debt issuance (such as increasing the short-term Treasury stock from $7 trillion to $14 trillion), but the continued growth of the stablecoin industry will still reshape the supply and demand landscape.

The hidden worries of the narrow banking model

The deeper contradiction is that fiat currency reserve stablecoins are highly similar to "narrow bank": 100% reserves (cash equivalents) and do not lend. This model is inherently low-risk (and the reason it was early on by regulatory approval), but a 10-fold increase in the size of stablecoins ($2 trillion in full reserves) will impact credit creation.

Traditional banks (partial reserve banks) only use a small amount of deposits as cash reserves, and the rest is used to lend to enterprises, home buyers, and entrepreneurs. Under supervision, banks manage credit risks and loan term to ensure that depositors can withdraw cash at any time.

The core reason for regulators to oppose narrow-sense banks to absorb deposits is that their monetary multiplier (small credit scale supported by a single dollar).

The economy depends on credit operation - regulators, enterprises and individuals all benefit from a more active and interconnected economic ecology. If only a small portion of the US $17 trillion deposit base migrates to fiat currency reserve stablecoins, banks' low-cost funding sources will shrink. Banks face a dilemma: shrink credit (reduce mortgages, car loans, SME credit lines), or replace lost deposits (but higher costs and shorter term) through wholesale financing (such as federal housing loan bank advance payments).

However, stablecoins are better currencies, and their circulation speed is much higher than traditional currencies - a single stablecoin can be sent, spent, and borrowed by humans or software around the clock, achieving high frequency use.

Stablecoins do not need to rely on treasury bond endorsement: tokenized deposits are another path - stablecoin debt remains on the bank's balance sheet, but circulates in the economy at the speed of modern blockchain. Under this model, deposits still remain in part of the reserve banking system, and each stable value token continues to support the issuing agency's loan business. The currency multiplier effect will return through traditional credit creation (rather than circulation speed), while users can still enjoy 7 × 24 settlement, composability and on-chain programmability.

When designing stablecoins, if the following three points can be achieved, it will be more conducive to economic vitality:

1. Through the tokenized deposit model, deposits are retained in part of the reserve system;

2. Diversified collateral (except short-term treasury bonds, included in municipal bonds, high-rated corporate notes, mortgage-backed securities (MBS), real-world assets (RWAs));

3. Built-in automatic liquidity pipeline (on-chain repurchase, tripartite facilities, CDP pool) to return idle reserves to the credit market.

This is not a compromise with banks, but an option to maintain economic vitality.

Remember: Our goal is to build an interdependent, sustained growth economic system that makes loans with reasonable business needs easier to obtain. Innovative stablecoin design can achieve this goal by supporting traditional credit creation, improving circulation speed, and developing mortgage-based decentralized lending and direct private lending.

Although the current regulatory environment restricts tokenized deposits, the clarification of the regulatory framework for fiat currency reserves has opened the door to stablecoins with the same collateral as bank deposits.

Deposit endorsement stablecoins allow banks to improve capital efficiency while maintaining existing customer credit and enjoy the programmability, cost and speed advantages of stablecoins. Its operating model can be simplified to: when a user chooses to mint a deposit endorsement stablecoin, the bank deducts the balance from the user's deposit account and transfers the liabilities to the stablecoin total account; stablecoins representing bearer claims in US dollars can be sent to the address specified by the user.

In addition to deposit endorsement and stable currency, other solutions can also improve capital efficiency, reduce friction in the treasury bond market, and increase circulation speed:

• Help banks accept stablecoins: banks can issue or accept stablecoins to retain the underlying asset income and customer relationships when users withdraw deposits, and at the same time expand payment business (no intermediary required);

• Promote individual and corporate participation DeFi: As more users directly custodialize stablecoins and tokenized assets, entrepreneurs need to help them obtain funds safely and quickly;

• Expand collateral types and tokenize: expand the scope of acceptable collateral (municipal bonds, high-rated corporate notes, MBS, real-world assets), reduce reliance on a single market, provide credit to borrowers outside the U.S. government, and ensure collateral quality and liquidity;

• Collateral is put on the chain to improve liquidity: tokenize collaterals such as real estate, commodities, stocks, and treasury bonds to build a richer collateral ecosystem;

• Mortgage Debt Position (CDP): Adopt MakerDAO's DAI model (with diversified on-chain assets as collateral), while diversifying risks, recreating the bank's monetary expansion on the chain. Such stablecoins require strict third-party audits and transparent disclosures to verify the stability of the collateral model.

Conclusion

Although the challenges are huge, the opportunities are even greater. Entrepreneurs and policy makers who understand the nuances of stablecoins will shape a smarter, safer and better financial future.